Self-preferencing in digital markets

Self-preferencing is at the forefront of competition enforcement in digital markets. The European Commission’s (EC) milestone Google Shopping decision and the subsequent judgment by the General Court (GC) have confirmed that self-preferencing by a dominant firm can be a standalone abuse. This has opened the door for competition authorities to develop several investigations against ‘big tech’ firms related to self-preferencing theories of harm.

In December 2022, the EC held its first technical workshop on the implementation of the new Digital Markets Act (DMA) which prohibits various forms of self-preferencing by designated digital gatekeepers. The per se approach adopted in the DMA contrasts with the effects-based approach endorsed by EU competition law and has further placed self-preferencing in the limelight, with potentially high stakes implications for the business models of dominant digital platforms as well as their competitors.

Competition enforcement of ‘big tech’ firms increasingly focuses on self-preferencing

The EC’s 2017 Google Shopping decision placed self-preferencing firmly on the radar of European competition enforcement as a potential standalone abuse. Following a seven-year investigation, the EC levied a €2.4 billion fine upon Google for abusing its dominant position in general search by displaying its own comparison-shopping service on its general search engine results page more favourably than rival comparison-shopping services. 

The EC’s decision was almost entirely upheld by the GC in its 2021 judgment, which dismissed Google’s appeal and confirmed that self-preferencing by a dominant firm could be considered, in certain circumstances, as a standalone abuse of dominance. The GC’s judgment highlights two conditions for self-preferencing to constitute an abuse of dominance: (1) the conduct must have actual or potential anticompetitive effects; and (2) the conduct must depart from what would be expected under normal competition.

The GC clarified that, regarding anticompetitive effects, a causal link can be established by showing a correlation between the conduct and market outcomes and additional corroborating information, such as assessments of market participants. Further, the GC noted that a ‘product improvement’ defence should be considered only at the stage where objective justification and potential efficiencies of the conduct are examined.

Since the EC’s Google Shopping decision, there has been an increasing number of investigations of ‘big tech’ firms and enforcement decisions on the basis of theories of self-preferencing or closely related conduct. These include the following: 

• In March 2019, the Italian Competition Authority opened an investigation into allegations that Amazon favoured those merchants selling on the Amazon Marketplace that also purchased its logistics services through giving them preferential access to the Buy Box and its Prime programme. In November 2021, the authority imposed a fine of €1.1 billion as well as behavioural remedies intended to restore competitive conditions in the relevant markets. In November 2020, the European Commission opened a similar investigation, which was ultimately closed in December 2022 also following legal commitments by Amazon.
  
  
• In June 2021, the French Competition Authority concluded an investigation into Google’s practice of allocating display ads, arguing that Google self-preferenced its own ‘Ad Exchange’ and ‘Double Click for Publishers’ services at the expense of rivals, levying a fine of €220 million. Also in June 2021, the EC began investigating whether Google abused its dominant position by favouring its own ad tech services. In February 2022, the UK Competition and Markets Authority concluded an investigation into Google’s ‘Privacy Sandbox’ proposals following behavioural commitments from Google. The investigation related to concerns that Google removing cross-site tracking of users on its Chrome web browser via third-party cookies would limit the information collection and targeting abilities of rival publishers and ad tech providers, while Google’s own abilities would be unaffected.
  
  
• Apple was fined by the Dutch Competition Authority in 2021 for prohibiting dating app developers from using third-party payment systems and is facing an EC investigation for the same conduct vis-à-vis music streaming app developers. It is also facing several other investigations including regarding its App Tracking Transparency Framework, which obliges third-party apps to ask for their users’ consent but does not affect Apple’s ability to use and combine user data from its own ecosystem. 

Overall, competition authorities are increasingly eager to challenge the core strategies of the ‘big tech’ companies, including those that may have helped them build their ecosystems in the first place, with overarching concerns about potentially abusive leveraging, distorting competition in adjacent markets, as well as strengthening of existing dominant positions.

Self-preferencing theories of harm

Theories of harm in cases concerning self-preferencing have two central elements: foreclosure and consumer harm. 

Foreclosure concerns typically relate to a firm that is active at upstream and downstream levels of a supply chain, which implements a discriminatory mechanism that inhibits or excludes its rivals’ access to critical inputs or customers, harming the rivals via reduced scale, increased costs, or diminished incentives to innovate. In the context of digital markets, the underlying concern is that a vertically integrated digital platform leverages its dominance at one level of the supply chain to distort competition at another level. 

A necessary condition for such conduct to harm consumers is that it forecloses a substantial part of the market. This depends on the importance of the platform as a supplier or buyer, as well as on the lack of sufficiently available alternative routes to market that would allow foreclosed rivals to mitigate the loss of access to inputs and/or customers. Another necessary condition is the absence of offsetting efficiencies from the conduct – in the face of sufficient efficiencies, consumers could benefit from the self-preferencing behaviour if it improves the functioning of the market overall, leading to better market outcomes. 

In the recent cases referred to above, competition authorities have offered varying degrees of detail when analysing the mechanisms through which consumer harm arises and have tended to focus on establishing the existence and significance of foreclosure rather than actual consumer harm. This may be because consumer harm is indirect and/or dynamic and harder to show in the context of digital platforms, where services are often free (i.e., without a measurable price).

Prohibition of self-preferencing conduct in the Digital Markets Act

The DMA has shifted the focus of enforcement by competition authorities towards an ex-ante regulation of dominant vertically integrated digital platforms. Articles (5)-(7) of the DMA list specific behavioural obligations that digital platforms designated as ‘gatekeepers’ must comply with. These obligations include per se prohibitions of various types of self-preferencing and leveraging conduct. For example, Articles (5)-(7) prohibit gatekeepers from: ranking their own products and services more favourably than those of third parties, requiring business users to use the gatekeeper’s payment service, or using non-public data that are provided or generated by business users in competition with those business users.

The DMA’s per se prohibition of self-preferencing by gatekeepers goes beyond the recommendations of some experts, who believe that self-preferencing should be subject to an effects test (with the burden of proof falling on the dominant platform) as self-preferencing may have pro-competitive rationales and may lead to efficiencies and better consumer outcomes. Similarly, the Google Shopping judgment endorsed an effects-based approach, finding that self-preferencing by a dominant undertaking is not abusive per se. 

Proponents of the DMA’s per se approach have argued that it offers speedy and effective enforcement, which is especially important in digital markets since restorative remedies for abusive self-preferencing are particularly difficult to design and enforcement decisions might come too late to provide any effective remedy or to restore competition. However, there is a risk that a blanket ban on widely defined categories of self-preferencing may have a negative impact on innovation and prevent outcomes that are in the interests of consumers, such as the development of new products. This risk should be considered in light of the limited flexibility provided by the DMA, where the obligations defined under Article (6) (but not in (5) and (7)) are “susceptible of being further specified”, and where Article (12) allows EC to update gatekeepers’ obligations.

Whether the DMA risks over-enforcement by potentially ignoring efficiency rationales in defence of gatekeepers’ self-preferencing activities – and the impact that the DMA will have on competition and innovation in digital markets more generally – will be clearer in the years to come.

Conclusion

While self-preferencing has been a prominent concern in relation to digital markets for some time, we expect that it will remain a hotly debated topic as the implementation of the DMA moves forward. There are evidently risks that a blanket ban on widely defined categories of self-preferencing will have a negative impact on innovation and prevent outcomes that are in the interests of consumers, such as the development of new products. 

Although the DMA does not contain a clear mechanism by which a gatekeeper can justify its behaviour on objective justification or efficiency grounds, it seems inevitable that in practice authorities will need to have these issues in mind as they specify how gatekeepers should interpret the legislation. 

For a more detailed analysis of these issues as well as a discussion of the key legal and legislative developments in relation to self-preferencing, see our chapter in the 2022 edition of the GCR's Digital Markets Guide.